Despite data, Japan shows signs of health

Moody's highlights Japan's 'considerable strengths'

TOKYO (MarketWatch) -- Japan's economy shrank by a record margin in first three months of the year, but economists say the situation is showing some signs of improvement and may see better days soon.

The Cabinet Office said Wednesday that the world's second-largest economy saw an annualized 15.2% drop in the first quarter -- the fastest decline on record. However, the result was above most analysts' predictions. See full story on Japanese gross domestic product.

Speaking following the data's release, Japanese Finance Minister Kaoru Yosano said that while the weakening labor market could pose further risks to the economy, some measures show signs of having finally reached a bottom.

"There have been some signs of improvement or bottoming out in some economic data such as exports and industrial output," Yosano said, according to comments reported by Reuters.

Andreas Schuster, a strategist at CLSA Tokyo, also sees signs of life in the latest data.

"Collapsing exports, which were the main drag on GDP in the last quarter of 2008 and the first quarter of 2009, have now stabilized and will be less of a negative for the current quarter," Schuster said.

Seiji Shiraishi, chief economist at HSBC Securities in Japan, said GDP for the second quarter will "likely move upward into flat quarter-on-quarter territory."

"Factors that should bolster growth include a stronger outlook for clear [quarter-on-quarter] increases in April-June production and exports ... and expectations for a temporary increase in personal consumption due to government policy initiatives," he said in a note to clients issued Friday, ahead of the GDP release.

Stocks have been improving as well. The nation's benchmark index, the Nikkei 225 Average, has inched up by over 5% in the year to date, while the broader Topix is up more than 2%.

On Wednesday, the Nikkei added 0.6% and the Topix tacked on 0.7% by the close in Tokyo. Japanese exporters traded on a mixed note, with Elpida Memory
ELPDF
(6665) falling 1.3%, but Nikon Corp.
NINOY, -0.65%
(7731) advancing 1.5% and Canon (7751)
CAJ, -0.17%
up 0.6%.

'Considerable strengths'

The economic data came just two days after Moody's Investors Service upgraded the rating on Japan's government debt securities to Aa2 from Aa3, but cut the nation's foreign-currency debt rating to Aa2 from Aaa.

The rating agency's comments following the move to upgrade domestic yen debt essentially shows that "Moody's places Japan's own financial crisis well and truly in the past, such that the sector has achieved symbiosis with the government in funding the very measures designed to buffer Japan's financial system from external risks," Naomi Fink, Japan strategist at the Bank of Tokyo-Mitsubishi UFJ, said in a note to clients late Tuesday.

'Moody's places Japan's own financial crisis well and truly in the past.'
Naomi Fink, Bank of Tokyo-Mitsubishi

In its press release, Moody's said that the now-unified rating of Aa2 reflected Japan's "considerable strengths," including "its large domestic savings, a strong home bias on the part of its domestic financial institutions and institutional investors, relatively low holdings of government debt by foreign investors and Japan's $1 trillion of official foreign exchange holdings."

It linked the cut in the foreign-currency debt to uncertainty over repayment priorities in terms of domestic debt versus foreign debt.

Finance Minister Yosano had said Tuesday that Moody's rating revision of the government bond ratings would prompt Japan's government to improve its finances, Dow Jones reported.

While government debt remains high, the upgrade to the yen-denominated bonds "prompted us to make fresh determination to work harder to improve fiscal health," Yosano said.

In a note Friday, HSBC's Shiraishi said that "given the trend in U.S. ISM orders since the beginning of 2009 and prospects for a boost from economic stimulus measures from summer onward, it is possible that the economy bottomed in January-March."

But he also said that a final conclusion on whether true recovery has begun must wait, as initial improvements in economic data could be "a reflection of a technical rebound from unprecedentedly low production levels and should not be interpreted as the first signs of a self-sustaining recovery."

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